Internet companies, investors agree to $1 billion settlement

Friday, June 27, 2003

NEW YORK -- Some of the hottest Internet companies of the 1990s boom tentatively agreed Thursday to pay investors at least $1 billion to settle allegations that the dot-coms' initial public offerings of stock were rigged to benefit favored customers.

The more than 300 companies also agreed to cooperate in the continuing case against 55 brokerages accused of making the secret deals, which allegedly were aimed at making big profits for the investors who were allowed to get in early.

The huge case involves 309 lawsuits filed by investors over IPOs between 1998 and 2000 at such former high-flying companies as Global Crossing,, Ask Jeeves and Red Hat.

The dot-coms were accused of knowing about the deals and failing to disclose them.

Under the settlement, the companies guaranteed investors an overall payment of at least $1 billion, but will not have to pay anything if the brokerages settle for at least that much, said Melvyn I. Weiss, chairman of a committee of plaintiffs' attorneys.

The class, which has not been formally defined, will cover any investor who bought shares at the time of the IPOs or in the aftermarket, up until Dec. 6, 2000, he said.

"This covers everybody who lost money. Most of our lead plaintiffs are just ordinary people who are investors," he said.

The dot-com companies' insurers will cover the settlement, which is subject to court approval.

The plaintiffs say the investment banks that underwrote the IPOs -- including J.P. Morgan, Credit Suisse First Boston, Morgan Stanley and Smith Barney -- plotted to artificially inflate the value of IPO stocks.

Among the techniques was a practice called "laddering," in which larger blocks of stock were allocated to investors who promised to take still more shares after the stock hit the open market.

Also, analysts who worked for the investment banks were accused of boosting dot-com stocks by deliberately issuing favorable research reports.

In addition, some investors were allegedly charged inflated commissions on other trades.

The settlement was reached after more than a year and a half of negotiations, Weiss said.

"We have always been of the mind that the primary target in this case is the underwriting community," Weiss said. "This gives us a huge booster shot in our case against them."

"This is by far the most complex securities litigation that has ever been brought, and the settlement process is equally complex," said Jack Auspitz, a lawyer with Morrison & Forester, who represents 30 to 40 of the Internet companies.

Gandolfo V. DiBlasi, a lawyer for the underwriters, was not immediately available to comment.

The Securities and Exchange Commission and the National Association of Securities Dealers conducted an extensive investigation of Wall Street's dealings in IPOs. Regulators have recommended strict limits on several questionable practices popular during the tech boom, including laddering.

Earlier this year, 10 of the biggest investment banks agreed to change their research and IPO practices in a $1.4 billion settlement reached with regulators.

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